EU Regulation of Cross-border Crowdfunding Services

The EU Parliament is about to adopt a crowdfunding regulation that will enable 'European crowdfunding service providers' (ECSPs) to help businesses raise funding directly from investors across the EU more easily than they can today. The regulation calls for the related funds flows to be handled under payment services regulation, and adds operational and prudential requirements related to lending and investment in securities. I have covered the regulation in more detail for Leman Solicitors in Ireland, as the EU regulation will be of little use to UK-based platforms owing to Brexit and the end of passporting, even where the regulation applies.

Since helping start Zopa, the first peer-to-peer lending platform, in 2005 I've acted for many peer-to-peer lending platforms and some crowd-investment platforms in the UK, as well as advising in relation to e-money and payment services since 1999. If you have plans in this area, please get in touch.

 

New Rules For P2P Lending And Crowd-Investment

A year after consulting on its proposals, the FCA has issued new rules for P2P lending and crowd-investment platform operators from 9 December 2019 (and certain mortgage rules immediately). I'm trawling through the detail, but have summarised the changes below. Let me know if I can help.

Originally, the FCA proposed to:

• set out the minimum information that P2P platforms need to provide to investors; 
• clarify what systems and controls platforms need to have in place to support the outcomes platforms advertise - particularly on credit risk assessment, risk management and fair valuation practices; 
• ensure arrangements are in place that take account of the practical challenges that platforms could face in a wind-down scenario; 
• extend marketing restrictions that already apply to investment-based crowdfunding to P2P platforms; 
• apply Mortgage and Home Finance: Conduct of Business sourcebook (MCOB) and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider - to address a potential gap in protections for home finance customers who undertake transactions through a P2P platform.

Sure enough, the new rules:

• Clarify what governance arrangements, systems and controls must be in place to support advertised performance (especially credit risk assessment, risk management and fair valuation practices);
• Strengthen plans for the wind-down of P2P platforms;
• Apply marketing restrictions to protect less experienced investors in loans;
• Introducing an appropriateness test for an investor’s knowledge and experience of P2P investments where no advice has been given to the investor, and what the assessment should include; and
• Specify minimum information that P2P platforms need to provide to investors. 

In addition, P2P platforms that offer home finance products (where none of the investors is an FCA authorised home finance provider) must comply the FCA's Mortgage and Home Finance Conduct of Business sourcebook (MCOB) and other Handbook rules from now. 

New FCA Consultation on P2P Lending and CrowdInvesting

The FCA is consulting on proposed changes to the regulation of P2P lending and crowd-investment platforms. Firms have until 27 October 2018 to respond. While the Treasury recently insisted at EU level (for what that's worth, post-Brexit) that it sees a significant distinction between P2P lending and crowd-investment platforms, the FCA's proposals severely erode any such distinction.

The FCA is concerned that investors may not:

• be given clear or accurate information, leading to the purchase of unsuitable financial products;
• understand or be aware of the true investment risk they are exposed to;
• be remunerated fairly for the risks they are taking;
• understand what may happen if the platform administering their loan fails;
• understand the costs they are paying for the services the platform provides; or 
• may pay excessive costs for a platform’s services

As a result, the FCA proposes to:

• set out the minimum information that P2P platforms need to provide to investors; 
• clarify what systems and controls platforms need to have in place to support the outcomes platforms advertise - particularly on credit risk assessment, risk management and fair valuation practices; 
• ensure arrangements are in place that take account of the practical challenges that platforms could face in a wind-down scenario; 
• extend marketing restrictions that already apply to investment-based crowdfunding to P2P platforms; 
• to apply Mortgage and Home Finance: Conduct of Business sourcebook (MCOB) and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider - to address a potential gap in protections for home finance customers who undertake transactions through a P2P platform.

Brussels Proposes Free Movement For Crowdfunding

The European Commission has proposed a crowdfunding regulation that would enable cross-border peer-to-peer business lending and investment-based crowdfunding. Rather than interfere with national regimes, the regulation is intended to enable platforms to apply to ESMA for an EU "label" or right to operate throughout the EEA on conditions that are more proportionate than some of the harsher national regimes (e.g. those applying MiFID). 

The regulation would not apply to platforms that facilitate consumer loans/mortgages or donation/reward-based crowdfunding, or to platforms that are already authorised as investment firms. There would be a limit of €1m on the total amount of each fundraising.

The Regulations would require effective and prudent management; complaints handling; management by people with appropriate skills and professional experience; the detection and prevention or management of conflicts of interest. There are also rules on outsourcing and client asset safeguarding. There would need to be an initial appropriateness assessment for each investors, and a "key investment information sheet" for each investment opportunity. Communications would need to be "clear, comprehensible, complete and correct." Secondary trading would need to occur via a "bulletin board" on the platform rather than a "trading system".

It is not clear when the Regulations might be made final, but they would take effect just over 12 months after publication.

All very much academic for UK-based platforms, fundraisers and investors if Brexit goes ahead...